Capital Structure and Leverage 5

Capital Structure and Leverage 5 - A B C D 9 MM's...

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Old Exam Questions - Capital Structure and Leverage Page 5 of 31 Pages A. As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent B. As EBIT increases, the EPS increases by a larger percent C. As EBIT increases, the EPS decreases D. None of the above 9. MM's Proposition I corrected for the inclusion of corporate income taxes is expressed as: A. V L = V U B. V L = V U + D(1-T C ) C. V L = V U + (T C )(D) D. V U = V L + (T C )(D) 10. What are some of the possible consequences of financial distress? A. Debtholders, who face the prospect of getting only part of their money back, are likely to want the company to take additional risks. B. Equity investors would like the company to cut its dividend payments to conserve cash. C. Equity investors would like the firm to shift toward riskier lines of business D. Equity investors would like the firm to settle up with creditors as fast as possible 11. The possibility of bankruptcy has a negative effect on the value of the firm because:
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